In business, management sets the standards of what quantity of materials should be used for a particular job. Especially on a manufacturing production line, unit cost plays a significant role in the final product cost and thus affects overall profits. Knowing the variance in quantity of materials budgeted versus the actual amount used to provide a service or make a product shows the effect the variance has on the final cost. A number of factors determine whether the direct materials efficiency variance end as unfavorable or not.

Identification

Direct materials efficiency variances, alternatively called direct materials quantity variances or direct materials usage variances, reveal the difference in the quantity of materials used in a process as compared with the quantity budgeted for the job. The result, shown as a monetary amount, permits management to adjust production or purchases as needed to conform to the standards the business wishes to meet. To calculate a direct materials efficiency variance, the formula is (actual quantity used × standard price) − (standard quantity allowed × standard price).

Upfront Standards

If more materials are used than needed or budgeted for the job, an unfavorable efficiency variance results. Conversely, a favorable direct materials efficiency variance results when fewer materials are used than planned. A miscalculation in the accounting for materials may result in a one-time or temporarily unfavorable direct material efficiency variance. However, in a situation where the original budgeted standard for materials was miscalculated, solving the problem easily by adjusting the numbers accordingly may be possible based on previous material usage when standards were met.

Inferior Materials

Beginning a production process with inferior materials in an attempt to save money can affect the direct materials variance. Lower-quality materials may require the use of more units of a particular material, resulting in an unfavorable direct materials efficiency variance.

Workers and Equipment

Theft of materials, spoilage and damage to materials caused by workers, worker errors or insufficiently trained workers on a production line or in a service industry are reasons for unfavorable direct material efficiency variances. Additionally, lack of supervision of direct labor and changes in production procedures can result in an unfavorable variance. Equipment failure, a breakdown on a production line or a glitch in the operation of a vital machine that results in spoilage or destroyed materials also can have an unfavorable effect on the variances.